With China poised to overtake Japan as the world's second-largest economy, and countries from Malaysia to South Korea fiscally sound and relatively debt-free after the recession, the great minds of international finance will soon have to coin a new term for what they currently designate as Asia's emerging markets. Their immediate priority is to capitalise on the region's export strength, investment flows, appreciating currencies and burgeoning domestic consumption. These indicators all point to sustained growth and, for the well-structured portfolio, the prospect of consistently attractive returns. 'We think Asia ex-Japan will be the play of choice in any kind of medium- to long-term outlook,' said Bhaskar Laxminarayan, chief investment officer for Asia at Pictet Wealth Management, which at the end of last year had assets under management of US$375 billion. 'It will be preferred among emerging markets for its growth trajectories and overall valuation.' He said perceived stability was one factor, but what really tilted things in Asia's favour were the demographics. Consumer markets in the region were now 'huge and sustainable', with China set for not just years, but decades of expansion. Pictet's view was that equity markets might be range-bound in the months ahead, with some surprises in store as stimulus policies wind down and liquidity tightens. But it was also a time to be more opportunistic. 'We are not in the bearish camp,' Laxminarayan said. 'At the beginning of the year, we [favoured] US equities, as the balance sheet strength and cash generation was a little better. But if looking at the next move, it would be going back to emerging markets for overall earnings growth.' This, he stressed, was in keeping with the firm's usual preference for the conservative end of the risk-reward spectrum. As a matter of policy, that outlook had always guided recommendations to clients, and it would not change. What seemed clear from the latest economic data, though, was that the fundamentals mostly pointed one way. Europe remained 'risky' in relative terms, as the continent wrestled with deficits, and the US was still 'repairing itself' and in need of private-sector investment. That did not necessarily mean all roads led to Asia, but any asset allocation strategy could not ignore the obvious. 'It will stabilise pretty quickly in Asia, and for every factor you can think of - automobiles, resources, currencies - China has a very significant role to play,' Laxminarayan said. Manpreet Gill, Asia strategist for Barclays Wealth, is also confident about the region's prospects. Still, he is keeping a wary eye on possible ramifications from events in the developed economies and is advising clients to add an element of insurance to their portfolios. 'Staying long in equities and buying government bonds in Asia is the best way, and not too defensive in this environment,' Gill said. He also recommended that investors be selective about how they gain exposure to Asia's emerging markets. Performance had come off a bit since January, even though it was still above average, meaning there were now 'only pockets of value'. As a result, it made sense to think about more active portfolio management and to look for other ways to capitalise than by just investing in stocks in the region. 'There is a lot of value at this point of the cycle, but it is about picking specific companies, not just general trends,' Gill said. 'Sometimes you have to take the indirect route.' One option was companies in developed markets - such as semiconductor firms - with 50 per cent or more of their revenue from Asia ex-Japan. Another was to be long in Asian currencies, bearing in mind the impact of a possible revaluation of the renminbi and continuing foreign direct investment. 'We regularly recommend investment in other Asian currencies to get the benefit [of the mainland]. And since China's growth is very commodity intensive, another way to approach it is through Australia.' Despite the mainland's surging gross domestic product figures and pre-eminent role in global trade, Gill said it was important, from an investment point of view, not to get too carried away by a single theme. 'You could make a case that a lot goes back to China, but if you look around there are many other good stories out there,' he said. And while local currency sovereign bonds in Asian emerging markets might be slightly riskier than US or Group of Seven government bonds, they would make money. They also provided good insurance in a portfolio and could bring positives from credit rating upgrades in countries such as Indonesia.